2016 (5) TMI 255 - AT - Income Tax

Tribunal partially allows appeal, excludes costs, remands price determination. Revenue's appeal partly allowed.

International Merchandising Corporation Versus DDIT, Circle-1 (2), International Taxation, New Delhi and Vica-Versa

International Merchandising Corporation Versus DDIT, Circle-1 (2), International Taxation, New Delhi and Vica-Versa - TMI Issues Involved:1. Disallowance of payment to Association of Tennis Professionals (ATP) under Section 40(a)(i) of the Income Tax Act.2. Addition on account of mark-up to be recovered by the appellant on reimbursement of expenses received from Associated Enterprises (AE) and re-computation of arm's length price (ALP) for services provided.3. Acceptance of additional evidence by CIT(A) under Rule 46A.4. Disallowance of personal expenses.Detailed Analysis:1. Disallowance of Payment to ATP (Rs.19,22,663):The CIT(A) confirmed the disallowance made by the AO of the payment to ATP under Section 40(a)(i) of the Act, treating it as royalty chargeable to tax and subject to withholding tax under Section 195. The assessee argued that the payment was for obtaining recognition for an international tennis event and should be considered a legitimate business expenditure. However, the tribunal upheld the CIT(A)'s decision, referencing a previous ruling that ATP is a non-resident sports institution, making Section 194E applicable to the payments.2. Addition on Account of Mark-Up and Re-Determination of ALP:The CIT(A) held that the appellant's logistic services to its AE required an arm's length mark-up on its cost base and rejected the appellant's claim that payments made by AEs were pass-through costs. The tribunal agreed with the CIT(A) that reimbursements received from AEs should be excluded from operating costs as they do not involve any functions performed. The tribunal referenced the case of HSBC Electronic Data Processing India Ltd. to support its decision. Additionally, the tribunal noted that the CIT(A) correctly applied the adjusted NCP margin of 11.6% for event management services, rejecting the foreign comparables used by the appellant due to different geographic markets. The tribunal remanded the issue back to the AO for verification of calculations and compliance with the +/- 5% range as per Section 92C(2).3. Acceptance of Additional Evidence by CIT(A) under Rule 46A:The CIT(A) admitted additional evidence provided by the assessee regarding sanctions and rights expenses incurred in Indian Rupees payable to Indian residents, which the AO had wrongly treated as payable to non-residents. The tribunal upheld the CIT(A)'s decision to admit this evidence, noting that the AO had not given the assessee an opportunity to explain the disallowance. The tribunal found the CIT(A)'s findings well-reasoned and did not require interference.4. Disallowance of Personal Expenses:The AO disallowed 20% of miscellaneous expenses on an ad hoc basis, suspecting them to be personal expenses. The CIT(A) deleted this disallowance, and the tribunal upheld this decision, noting that the AO did not provide a basis for the ad hoc disallowance and that the CIT(A) properly appreciated the facts.Conclusion:The tribunal partly allowed the appeal of the assessee, specifically allowing the exclusion of reimbursement costs from operating costs and remanding the issue of ALP determination back to the AO for verification. The appeal of the revenue was also partly allowed, affirming the CIT(A)'s acceptance of additional evidence and deletion of ad hoc disallowance of personal expenses. The tribunal's decisions were consistent with previous rulings and applicable legal provisions.